How Governments Control Generic Drug Prices Without Direct Price Caps

When you pick up a generic version of your prescription, you’re not just getting a cheaper version of the same medicine-you’re benefiting from a carefully designed system that lets competition do the heavy lifting. Unlike brand-name drugs, which can cost hundreds or even thousands of dollars a month, generic drugs often cost less than $10. In fact, 90% of all prescriptions filled in the U.S. are for generics, yet they make up just 23% of total drug spending. That’s not an accident. It’s the result of deliberate government policies that focus on generic drug pricing through competition, not direct price setting.

Why Governments Don’t Set Prices for Generic Drugs

Most people assume that if drug prices are high, the government must step in and cap them. But when it comes to generics, that’s not how it works. The U.S. government doesn’t set prices for generic medications because the market already does it better. Once a brand-name drug’s patent expires, multiple manufacturers can start making the same pill. Each one wants your business, so they slash prices to win contracts with pharmacies, insurers, and government programs like Medicare.

By the time three or more generic makers are selling the same drug, prices usually drop to just 10-15% of the original brand’s cost. The FDA found that within six months of a new generic entering the market, prices fall by 75%. After two years, they’re down 90%. That’s not because a regulator ordered it. It’s because competition forces companies to undercut each other.

Even the most recent federal efforts to lower drug costs, like the Inflation Reduction Act of 2022, explicitly leave generics out. The law lets Medicare negotiate prices for 15 high-cost brand-name drugs by 2027-but only if no generic version exists. The Department of Health and Human Services confirmed this in April 2024: generics don’t need negotiation because they’re already affordable.

The Hatch-Waxman Act: The Foundation of Generic Competition

The system that makes this possible started in 1984 with the Hatch-Waxman Act. Before this law, generic manufacturers had to run the same expensive clinical trials as the original drugmaker-even though the medicine was identical. That made generics too costly to produce. Hatch-Waxman changed that by letting generics prove they were bioequivalent to the brand, not reinvent the drug.

Instead of repeating full clinical trials, generic companies submit an Abbreviated New Drug Application (ANDA). This cuts development costs from $2.6 billion (for a new brand) to just $2-3 million. That’s why thousands of generics flood the market after patents expire. In 2023 alone, the FDA approved 1,083 generic drugs. That’s more than three per day.

The result? More options. Lower prices. And no need for price controls.

How the FDA Speeds Up Generic Approvals

Approval time used to be a bottleneck. In the early 2010s, it took an average of 18 months for the FDA to review a generic drug application. That delay meant fewer competitors entered the market, and prices stayed higher longer.

That changed with the Generic Drug User Fee Amendments (GDUFA), first passed in 2012 and renewed in 2022 with $750 million in industry fees through 2027. The goal? Cut approval time to 10 months. And it worked. By 2023, the FDA hit a 92% compliance rate for standard generics, meeting its 10-month target. That’s a 44% faster approval process than a decade ago.

For complex generics-drugs with tricky formulations like inhalers, injectables, or extended-release pills-the process is still slower. Only 38% of those met the 10-month deadline in 2023. But the FDA responded by creating a new submission template in late 2023. Early results show a 35% reduction in review time for these harder-to-make drugs. Real-time tracking is now available through the FDA’s Generic Drug User Fee Public Dashboard, so manufacturers and pharmacists can see where each application stands.

Stopping Anti-Competitive Tactics That Hurt Prices

Not all manufacturers want competition. Some brand-name companies pay generic makers to delay entering the market. These deals, called "pay-for-delay," keep prices high by blocking cheaper alternatives.

The Federal Trade Commission (FTC) has made shutting these down a top priority. In 2023 alone, the FTC challenged 37 pay-for-delay agreements. One study estimated that stopping these deals saves consumers $3.5 billion a year. The FTC also blocked the proposed merger between Teva and Sandoz in January 2024, fearing it would reduce competition for 13 key generic drugs.

Another tactic is "product hopping"-when a brand company slightly changes its drug (like switching from a pill to a tablet) and pushes patients to the new version just before the patent expires. This tricks insurers and pharmacies into staying with the expensive brand instead of switching to the cheaper generic. The FDA’s 2024-2026 Generic Drug Implementation Plan now targets these practices directly, encouraging faster approval of authorized generics (the same drug made by the brand company itself) to prevent this kind of manipulation.

How Medicare and Insurers Use Rebates to Keep Costs Low

Even without government price caps, Medicare Part D and private insurers have their own ways of keeping generic prices down. They don’t pay the list price. They negotiate rebates.

In 2024, Medicare Part D plans paid generic drugs at an average of 15% below the Average Manufacturer Price (AMP). For preferred generics-those on the plan’s preferred list-rebates averaged 28%. Non-preferred generics still got 15% off. These rebates are built into the system, not forced by law. Pharmacies and insurers choose which generics to promote based on cost.

That’s why 76% of Medicare beneficiaries pay $10 or less for their generic prescriptions. Compare that to just 28% for brand-name drugs. A 2024 KFF survey found that 82% of generic users are satisfied with affordability-compared to only 41% of brand-name users.

The Rare Cases Where Generic Prices Spike

Most of the time, generics stay cheap. But sometimes, they don’t. When only one or two companies make a drug, competition disappears. That’s when prices can jump.

For example, in 2023, the generic version of sertraline (an antidepressant) went from $4 to $45 per month at some pharmacies. That spike affected less than 0.3% of all generic drugs. The FDA’s Drug Shortage Report showed that 18% of hospital pharmacists had trouble getting critical generics because manufacturers stopped making them. Why? The price had fallen below the cost to produce.

This is the tightrope of generic pricing: too low, and companies quit. Too high, and patients suffer. The system works best when there are enough competitors to keep prices in check. When there aren’t, the FTC and FDA step in to encourage new entrants or block mergers that reduce choices.

Why Other Countries Do It Differently

In the U.S., there are, on average, 14.7 manufacturers per generic drug. In Europe, it’s 8.2. In Japan, just 5.3. More competitors mean more price pressure. That’s why U.S. generic prices are lower than in most other wealthy countries-even though the U.S. spends more overall on healthcare.

Some countries, like Canada and the UK, set direct price caps on all drugs, including generics. But studies show those systems often lead to shortages. If a company can’t make a profit at the capped price, they stop producing the drug. The U.S. approach-letting competition drive prices-keeps drugs available and affordable.

What’s Next for Generic Drug Pricing?

The future of generic pricing isn’t about more regulations. It’s about removing barriers. The CMS proposed rule in April 2024 aims to stop insurance plans from requiring unnecessary prior authorization for generics. That alone could save Medicare beneficiaries $420 million a year.

The Congressional Budget Office projects generic drug prices will keep falling-by 3.5% annually through 2030. Branded drugs? They’ll rise by just 0.8%. That gap isn’t closing because of a law. It’s closing because competition works.

Experts like Dr. Aaron Kesselheim of Harvard Medical School say adding price controls to generics would be unnecessary-and possibly harmful. "Generic drugs have demonstrated the ability to achieve substantial price reductions through competition alone," he told the Senate Finance Committee in 2024. "Additional price controls could reduce incentives to enter the market, leading to fewer options and higher prices in the long run."

The real policy win isn’t setting a price. It’s making sure enough companies can enter the market, make the drug, and sell it without being blocked by patents, mergers, or red tape.